Pension Reform of PRC - Hitotsubashi Universitytakayama/English/pdf/ADBI0212ppt.pdf · Pension Reform of PRC: ... • Creating Guaranteed Minimum Pensions for those with no pensions

1

Pension Reform of PRC:Pension Reform of PRC:Incentives, Governance and Policy OptionsIncentives, Governance and Policy Options

byby

Noriyuki TakayamaNoriyuki Takayama

Visiting Scholar at ADB Institute and Visiting Scholar at ADB Institute and Professor of Economics, Hitotsubashi UniversityProfessor of Economics, Hitotsubashi University

[email protected]@[email protected]@ier.hit--u.ac.jpu.ac.jp

http://www.ier.hithttp://www.ier.hit--u.ac.jp/~takayama/u.ac.jp/~takayama/

ADB Institute 5ADB Institute 5thth Anniversary Conference on Challenges and New Agenda for PRCAnniversary Conference on Challenges and New Agenda for PRC55--6 December 20026 December 2002

2OrganizationOrganization

1.1. IntroductionIntroduction

2.2. Historical BackgroundHistorical Background

3.3. Current ProvisionsCurrent Provisions

4.4. Main Indicators of PRC PensionsMain Indicators of PRC Pensions

5.5. Major IssuesMajor Issues

6.6. Basic Evidences from MicrodataBasic Evidences from Microdata

7.7. Future Policy OptionsFuture Policy Options

8.8. Challenges for Better ImplementationChallenges for Better Implementation

9.9. Concluding RemarksConcluding Remarks

3

Historical BackgroundHistorical BackgroundThe 1951 LegislationThe 1951 LegislationPeriod of the Cultural RevolutionPeriod of the Cultural RevolutionThe 1978 AmendmentsThe 1978 AmendmentsThe 1986 EnforcementThe 1986 EnforcementThe 1991 ResolutionThe 1991 ResolutionThe 1997 Establishment of A New SystemThe 1997 Establishment of A New SystemThe 10The 10thth FiveFive--Year SS Plan in 2001Year SS Plan in 20012001/2002 Experiments in Liaoning2001/2002 Experiments in Liaoning

4

The 1951 LegislationThe 1951 Legislation

Covered People:Covered People:workers of SOE, COE, Govworkers of SOE, COE, Gov’’t & Govt & Gov’’tt--related related institutionsinstitutions

Normal Retirement Age:Normal Retirement Age:60 for men (min. 25 yrs of coverage)60 for men (min. 25 yrs of coverage)55 for white55 for white--collar women (min. 20 yrs)collar women (min. 20 yrs)50 for blue50 for blue--collar women (min. 20 yrs)collar women (min. 20 yrs)

Special Rules for those in hazardous occupations:Special Rules for those in hazardous occupations:5 yrs before NRA5 yrs before NRA

5

The 1951 Legislation (contThe 1951 Legislation (cont’’d)d)Replacement Rate (RR):Replacement Rate (RR):

5050--70% depending on covered years70% depending on covered years(no flat(no flat--rate benefits)rate benefits)

Contribution RateContribution Rate3% by employers only3% by employers only

Pooling of ContributionsPooling of Contributionsnationwide (30%) & each local level across nationwide (30%) & each local level across enterprisesenterprises

Current A/CCurrent A/Csubstantial surplus until 1965substantial surplus until 1965

6

Period of Cultural Revolution (1966Period of Cultural Revolution (1966--1977)1977)

The system ceased to exist. The funds were used The system ceased to exist. The funds were used for other purposes. All for other purposes. All SOEsSOEs stopped stopped collecting money for public purposes.collecting money for public purposes.Individual enterprises virtually became Individual enterprises virtually became responsible for paying pensions to their responsible for paying pensions to their employees out of current revenues (an employees out of current revenues (an EnterpriseEnterprise--based Protection!). based Protection!). Payments of old Payments of old age pensions were often postponed. Many age pensions were often postponed. Many older persons were forced to continue working older persons were forced to continue working beyond the NRA.beyond the NRA.

7

The 1978 AmendmentsThe 1978 AmendmentsProviding Incentives to Early RetirementProviding Incentives to Early Retirement

full pensions from 10 yrs of coveragefull pensions from 10 yrs of coverage60% RR for those with 1060% RR for those with 10--14 contributing yrs14 contributing yrs70% RR for those with 1570% RR for those with 15--19 CY19 CY75% RR for those with 20 CY and more75% RR for those with 20 CY and moreA job in a state sector was promised to one child per A job in a state sector was promised to one child per retiree for all state employees.retiree for all state employees.→→ Rapid Expansion of Pension Expenditure Rapid Expansion of Pension Expenditure

Forcing Each Enterprise to Bear Full Responsibility Forcing Each Enterprise to Bear Full Responsibility for Old Age Pensions of Its Employeesfor Old Age Pensions of Its Employees

8

Economic Reforms in the Early 1980sEconomic Reforms in the Early 1980s

giving enterprises more financial autonomygiving enterprises more financial autonomycompetition among enterprises intensifiedcompetition among enterprises intensifiedSOEs facing cost disadvantages due to social SOEs facing cost disadvantages due to social obligationsobligationsgreat difficulty in downsizing the SOE work forcegreat difficulty in downsizing the SOE work force←← sstrong resistance from SOE workerstrong resistance from SOE workers

⇒⇒Lack of Pension PortabilityLack of Pension Portabilitybecoming a major stumbling block to the SOE becoming a major stumbling block to the SOE restructuringrestructuring

9

The 1986 EnforcementThe 1986 Enforcement

pooling of contributions within each municipality pooling of contributions within each municipality

started. started. Social Insurance Agencies (SIA) were newly Social Insurance Agencies (SIA) were newly

established to administer the pension funds.established to administer the pension funds.

3% contributions 3% contributions of basic wages introduced of basic wages introduced to all new to all new

SOE employeesSOE employees

15% contributions 15% contributions of preof pre--tax wagestax wages by employersby employers

10

The 1991 State Council ResolutionThe 1991 State Council Resolution

integration of local programs promoted at the provincial level and eventually at a national level with unifying pension provisionsguidelines of a three-tier system shown: mandatory basic pensions with state subsidy voluntary occupational & individual pensionsnew experiments without basic pensions permitted in private and joint-venture enterprisesintroduction of old age pensions in rural areas decided

11

The 1995 State Council CircularThe 1995 State Council Circular

• establishing individual pension a/c announced

• expanding coverage to all urban workers regardless of firm ownership proposed

• great diversity in choosing system design for local pensions pools allowed

12

Two Major Developments after 1995Two Major Developments after 19951. Massive Lay-off Emerged

8.2 million workers in 199614.4 million workers in 1997→ Building pension portability became urgent.

2. A serious financial crisis began. Payment delays experienced in many areas and the current a/c of old age pensions turned into deficit from 1998.← rising dependency ratio← non-compliance in paying contributions

13

The 1997 Establishment of A New SystemThe 1997 Establishment of A New System• consolidation of pension pools at the provincial

level requested

• unification of the pension system (including benefit formula, contribution rates and eligibility requirements) across consolidated pools also requested

• shift to the three-tier system promoted• Mandatory DB tier for redistribution

• Mandatory DC tier for each worker

• Voluntary tier of occupational or individual pensions

14

The 1999 State Council OrderThe 1999 State Council Order

Speed-up of Expanding Coverage:including non-state enterprises and migrant workers into the pension pools

15

The 2001 10The 2001 10thth FiveFive--year SS Plan year SS Plan • Contributions to the Individual A/C

• to be reduced from 11% to 8% from employees only

• separate management from the social pooling funds

• 20% contributions from employers are to be deposited into the social pool.

• Increases in Basic Benefits

from 20% RR to 30% RR

• Unifying pension programs between civil servants and urban employees

8% payroll tax for each civil servant

20% payroll tax for employers (state)

16

2001/2002 Experiments in Liaoning Province2001/2002 Experiments in Liaoning Province• Creating Real Individual A/C

8% payroll tax for employees, separately managed from the social pool

• Encouraging Employees’ Contributions basic benefits to be increased up to 30% of provincial average wages with coverage of 15 yrs or more

• Creating Guaranteed Minimum Pensions for those with no pensions

• Promoting the Third-tier Supplementary Pensions Contributions from employers are tax-deducible up to 4% of total pre-tax wages.

17

Current Provisions Current Provisions

1.1. A New Benefit StructureA New Benefit Structure2.2. Group CategoryGroup Category3.3. Benefit PaymentsBenefit Payments4.4. Eligibility ConditionsEligibility Conditions5.5. ContributionsContributions6.6. State SubsidyState Subsidy7.7. VariationsVariations

18

A New Benefit Structure for Mandated PensionsA New Benefit Structure for Mandated Pensions

1.1. The 1The 1stst--tier (DB) tier (DB)

a a flatflat--rate basic benefit:rate basic benefit:

20% of the average regional wage at retirement20% of the average regional wage at retirement

2.2. The 2The 2ndnd––tier (DC, individual a/c)tier (DC, individual a/c)

the the pensionablepensionable age: 55 age: 55

monthly benefits = (total pension wealth)/120monthly benefits = (total pension wealth)/120

In total, 58.8% RR will be assured for the averageIn total, 58.8% RR will be assured for the average--

wage earner with 35 covered years.wage earner with 35 covered years.

19

Group Category for the Transition PeriodGroup Category for the Transition Period

1. Old Men1. Old MenPeople who retired prior to 1997People who retired prior to 1997

2. Transitional Men (Middle Men)2. Transitional Men (Middle Men)People who joined firms before 1997 People who joined firms before 1997 and had not retired by that yearand had not retired by that year

3.3. New MenNew MenPeople who joined firms after 1997People who joined firms after 1997

20

Benefit Payments for Each CategoryBenefit Payments for Each Category1. Old Men

previous benefits maintained, financed from the social pool

2. Transitional Men

1) a basic benefit from the social pool

2) a benefit from the individual a/c

3) a transitional benefit from the social pool depending on covered yrs prior to 1997

3. New Men

1) a basic benefit from the social pool

2) a benefit from the individual a/c

21

Eligibility Conditions for Old Age PensionsEligibility Conditions for Old Age Pensions

• Coverage of 15 yrs and more

• NRA Remains Unchanged

• Early retirement is permitted to those who are totally disabled from age 45 for women, and from age 50 for men with 10 yrs coverage.

• Lump Sum Retirement Benefits:

those with less than 15 yrs coverage

22

ContributionsContributions

1. The Social Pool

13% of payroll: employers only

2. The Individual A/C

1) 4% of wages: employees

2) 7% of pretax wages: employers

Total: 24% payroll tax with state subsidy

contributory wages:60-300% of average local wages

(in 1997)(in 1997)

23

Contributions (ContContributions (Cont’’d)d)

Employer/Employee Split in the Individual A/C to Be Changed

1. The employee contribution rate was to rise every 2 years by 1% until it reached 8%.

2. There was to be an offsetting decrease every 2 yrs by 1% from the employer until its contribution rate equals to 3%.

3. In total, 11% payroll tax is to be maintained.

24Fiscal Subsidies to PensionsFiscal Subsidies to Pensions

Over 40Over 4020012001

Over 40Over 4020002000

Over 20Over 2019991999

Over 10Over 1019981998

Over 5Over 51997

SubsidiesSubsidiesYearYear

Source: Zhao-Xu (2002)

(billion (billion yuanyuan))

25

Fiscal Subsidies (ContFiscal Subsidies (Cont’’d)d)

• heavily transferred to provinces which had the relatively high share of retired SOE workers: For example, Liaoning and Heilongjiang combined received 26% of total state subsidies in 1999.

• State subsidies were equivalent to 17% of aggregate pension benefits in 2000.

26

VariationsVariations

Between-urban Differences in the Mandatory Contribution Rate

Highest Extremes:49.39%: Xinjiang Production & Construction Corps.

29.00%: Jinan

26.55%: Liaoning

25.12%: Heilongjian

Lowest Extreme:13%: Shenzhen

27

Variations (ContVariations (Cont’’d)d)Urban/Rural Differences

Rural pensions launched in 1991. The core is voluntary individual contributions from age 12 to 50 at one of 9 levels between 4 and 20 yuan a month. The NRA is 60.

• 62m contributors & 1m pensioners currently• 1% coverage • low benefits (50 yuan or less per pensioner)

28

Variations (ContVariations (Cont’’d)d)Occupational Differences

Civil servants and employees of state organizations/institutions have a different program of generous benefits with no individual contributions. The program covered 30m people with aggregate benefits at 0.44% of GDP in 1999.

Time DifferencesSignificant changes for the past 10 yrs Further changes probable in the future

29

Pension Benefits for Civil ServantsPension Benefits for Civil Servants

Source: Ministry of Labor and Social Security, 2001.Source: Ministry of Labor and Social Security, 2001.

88%88%35 and over35 and over

82%82%30 to 3430 to 34

75%75%20 to 29

60%60%10 to 19

40%40%~9 Years

Replacement RateLength of Service

30

Main Indicators of PRC PensionsMain Indicators of PRC PensionsCoverage

System Dependency Ratio

Replacement Rate

Contributions/wages

Aggregate Benefits/GDP

Speed of Aging

TFR & Life Expectancy

Long-term Financial Performance

31Public Pensions: Coverage & Dependency RatioPublic Pensions: Coverage & Dependency Ratio

0

10

20

30

40

50

60

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

(Contributors)/(Urban employees)

(Pensioners)/(Contributors)

(Contributors)/(Total Population)

(%)

Source: Whiteford (2001)

Year

32

Pension Indicators of PRCPension Indicators of PRC

0

10

20

30

40

50

60

70

80

90

100

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

(Average Benefits)/(GDP per Capita)

(Average Benefits)/(Average SOE Wages)

(Contributions)/(SOE Wages)

(Pension Spending)/GDP

(%)

Year


33

Speed of Aging in Selected Asian CountriesSpeed of Aging in Selected Asian Countries

0

5

10

15

20

25

30

35

40

45

2000 2005 2010 2015 2020 2025 2030 2035 2040

Hong Kong

Korea, Rep.

Singapore

China

Source: Palacios & Pallares-Miralles (2000)

(%)

(Population 60+)/(Total)

Year

34

Speed of Aging: China vs JapanSpeed of Aging: China vs Japan

0

5

10

15

20

25

30

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

JapanChina

7.1

7.0

27.3

20.8

Source: NIPSSR, Japan (2002); State Family Planning Committee, China (1999)

(%)

2001 2006 2011 2016 2021 2026 2031 2036 2041 2046 (JPN)(CHN)

(Population 65+)/(Total)

Year

35

Provincial Differences in Dependency RatioProvincial Differences in Dependency Ratio

12.3

19

14 13.7 13 .3

11.210 .6 10.4

7 .36 .9 6 .7

0

2

4

6

8

10

12

14

16

18

20

Shanghai Jiangsu Beijing Zhejiang Guangdong Nationwide Liaoning Yunnan Heilongjiang Xinjiang Ningxia


(Population 65+)/(20-64)

(%) (year 1999)

36

0

1

2

3

4

5

6

7

8

1953 1968 1980 1984 1988 1998 2010 2030 2050

Sources: State Family Planning Commission, 2002; China Population Yearbook, China Science and Technology Press, 1995; Li Jianmin, Yuan Xin and Wang Jinying, The Sustainable Challenges- the Population Trends, Issues and Policies, Science Publishing House, 2000; Ding (2002).

TFR

Year

Total Fertility Rate

TFR in PRCTFR in PRC

37

Life Expectancy at BirthLife Expectancy at Birth

30

40

50

60

70

80

90

1953 64 72 81 90 2000 10 20 30 40 50

Sources: State Family Planning Commission, 2002; Jiang Zehnghua, The Projection for the National and Regional Populations, China Population Press, 1997; Ding (2002).

Female

Male

Year

Years

38

Major IssuesMajor Issues

Financing

Implementation/Governance

Program Design

Coverage

Detailed Studies

39

LongLong--term Financial Performanceterm Financial Performance

Pension Benefits over Aggregate Wages

22.4%22.4%34.934.942.842.842.442.4

20002000202020202030203020402040

Benefits/WagesBenefits/WagesYearYear

Source: Chen, J. (2001), Source: Chen, J. (2001), China Social Security Report: 1997China Social Security Report: 1997--20012001, China, ChinaAcademic Literature Publishing House; Ding (2002)Academic Literature Publishing House; Ding (2002)

40

Financing IssuesFinancing Issues

Deficit Financing from Increased General Revenue• Recognition Bonds (Sun-Maxwell, 2001)

• Sales of SOEs (cf. Timing)

(Sun-Maxwell, 2001, James, 2001, Zhao-Xu, 2002)

• A Lottery (James, 2001, Sun-Maxwell, 2001)

cf. Persistent Gov’t Deficit since 1979

41

Financing IssuesFinancing Issues (Cont(Cont’’d)d)

Deficit Financing from Increased Contributionsfull reporting of wages with full tax deductions of contributions (Sun-Maxwell, 2001)

Full Funding of the 2nd-tier Contributions with a Higher Rate of Return (Sun-Maxwell, 2001, Zhao-Xu, 2002)

Reducing RR to 60% (Sun-Maxwell, 2001, James, 2001)

Increasing the NRA to 65 (Whiteford, 2001, James, 2001, Dorfman-Sin, 2001)

Shift to CPI Indexation (Whiteford, 2001, James, 2001, Dorfman-Sin, 2001)

Extending the Min. Covered Years (Whiteford, 2001)

42Financing IssuesFinancing Issues (Cont(Cont’’d)d)

The 2nd-Tier Program• An “Empty Box” (merely an entitled accounting book)

Ding (2002), Zhao-Xu (2002), Sun-Maxwell (2001)

• Administered Rate of Return, Too Low

set to equal the 3-month time deposit rate (1.98% in 1999) James (2001), Ding (2002), Zhao-Xu (2002)

• 10-yr Life Expectancy Assumption→ a shift to pensions on an actuarially fair basis required

James (2001), Zhao-Xu (2002), Sun-Maxwell (2001)

• Development of Domestic Financial Market, LackingJames (2001)

43Implementation Issues Implementation Issues

Weak Enforcement Capability with Little Incentives

• Enterprises still often operate as an administrative body, while financing obligations of pensions are separated.

• Most SOEs are owned by sub-national Gov’ts which have no power to issue debt.

• Central Gov’t has the power to issue debt, but fiscal resources are mostly controlled by provincial gov’ts. Thus, Central Gov’t is unlikely to issue debt for pensions.→Separation of Administration from Financial

Responsibility

→Moral Hazard and Low Compliance

→ Increased Financial Difficulties

44Implementation IssuesImplementation Issues (Cont(Cont’’d)d)Moral Hazard (Zhao-Xu, 2002)

• Removing the control of pension pools by municipalities (pension funds: an important source of investment for each municipality)

→Disincentive to collecting contributions

• Cross-subsidization through the pension pool

→No incentive for a municipality to generate a surplus

→No incentive to keep the deficits down

⇒Provincial Pooling Achieved by 2000

complete pooling in 5 provinces

partial pooling in 17 provinces

no pooling in 8 provinces

←unwillingness of municipalities

45Implementation Issues (ContImplementation Issues (Cont’’d)d)The 15-yr Rule →Massive Early Retirement

Underreporting of wagesunreported payments: about 50% of reported wages

Sun-Maxwell (2001)

Underreporting of No. of Employees (Zhao-Xu, 2002)

Disincentives to Honest Reporting• a heavy payroll tax for employers of non-SOE enterprises• a lower rate of return from the 2nd-tier investment• smaller tax deductions permitted in corporate income tax

provisions, up to 800 (960 yuan in large cities) per employee per month

• no penalty against underreporting or delay of paymentsSun-Maxwell (2001), Zhao-Xu (2002)

46

Implementation IssuesImplementation Issues (Cont(Cont’’d)d)Liaoning Experiment:

Increasing Disincentive to Participation?← increases in contributions to the

social pool← reduction in contributions to the

2nd-tierZhao-Xu (2002)

47Program DesignProgram DesignThe 1997 Provisions:

partial applications to the World Bank model (1994)

few doubts yet from PRC domestic pension experts

hot debate around the world

The 2nd-tier in Practice:

A PAYG DB plan instead of an envisaged funded DC plan

Switching to what?to a funded plan or to a Notional DC plan

48

CoverageCoverage

Urban workers

Rural farmers

Migrant workers

49

Detailed StudiesDetailed Studies

• Lacking are detailed studies using micro data.

• Figures on average are only available.

• Deeper understanding is required before assessing the effects of alternative policy options.Whiteford (2001)

50

Basic Evidences from MicrodataBasic Evidences from Microdata

Data Guide

1) The 2000 Survey of Workers and Pensioners in 42 Major Cities of PRC, conducted by MOLSS in June-August 2001

2) The 1995 Family Income and Expenditure Survey, conducted by Chinese Academy of Social Science, containing 6935 hh observations (21,696 persons) in urban areas

51

China MapChina Map

52

Proportion of SOE PensionersProportion of SOE Pensioners

80

13

7

0%

20%

40%

60%

80%

100%

45～49 50～54 55～59 60～64 65～69 70+ TotalAGE

OTHERCOESOE

1) Males1) Males

Source: Ding-Takayama (2003)

53

Proportion of SOE Pensioners in 2000Proportion of SOE Pensioners in 2000

61

31

8

0%

20%

40%

60%

80%

100%

45～49 50～54 55～59 60～64 65～69 70+ TotalAGE

OTHERCOESOE

2) Females2) Females


54

Proportion of SOE Workers in 2000Proportion of SOE Workers in 2000

72

17

10

0%

20%

40%

60%

80%

100%

～19 20～24 25～29 30～34 35～39 40～44 45～49 50～54 55～59 60～64 65～69 Total

AGE

OTHERCOESOE

1) Males1) Males


55

Proportion of SOE Workers in 2000Proportion of SOE Workers in 2000

62

28

10

0%

20%

40%

60%

80%

100%

～19 20～24 25～29 30～34 35～39 40～44 45～49 50～54 55～59 60～64 65～69 Total

AGE

OTHERCOESOE



56

Early Retirement in 2000Early Retirement in 2000

34

2

64

0%

20%

40%

60%

80%

100%

55 56 57 58 59AGE

No PensionsPensionersNo WagesWage Earners

1) Males1) Males


57

Early Retirement in 2000Early Retirement in 2000

61

4

35

0%

20%

40%

60%

80%

100%

45 46 47 48 49 AGE

No PensionsPensionersNo WagesWage Earners



58

Age Profile of Monthly Pension BenefitsAge Profile of Monthly Pension Benefits (DEC 2000)(DEC 2000)

380

400

420

440

460

480

500

520

45-49 50-54 55-59 60-64 65-69 70+ AGE

yuan

0

10

20

30

40

50CV(%)

MeanMedianModeCV

1) Males1) Males


59

Age Profile of Monthly Pension BenefitsAge Profile of Monthly Pension Benefits (DEC 2000)(DEC 2000)

340

350

360

370

380

390

400

410

420

430

440

45-49 50-54 55-59 60-64 65-69 70+ AGE

yuan

0

10

20

30

40

50CV(%)

MeanMedianModeCV



60

0

5

10

15

20

25

30

35

40

1-249 250-299 300-349 350-399 400-449 450-499 500-549 550-599 600-799 800-1299

1300+

yuan

(%)

Mean: 475 yuan

Median: 448 yuan

CV: 35.3%


Distribution of Monthly Pension Benefits Distribution of Monthly Pension Benefits (DEC 2000)(DEC 2000)

1) Males (Total)1) Males (Total)

61

0

5

10

15

20

25

30

35

40

45

1-249 250-299 300-349 350-399 400-449 450-499 500-549 550-599 600-799 800+

yuan

(%)

Mean: 392 yuan

Median: 410 yuan

CV: 23.5%


2) Females (Total)2) Females (Total)

Distribution of Monthly Pension Benefits Distribution of Monthly Pension Benefits (DEC 2000)(DEC 2000)

62

Age Profile of Monthly Wages Age Profile of Monthly Wages (DEC 2000)(DEC 2000)

0

100

200

300

400

500

600

700

～19 20～24 25～29 30～34 35～39 40～44 45～49 50～54 55～59 60～64 65～69 AGE

yuan

0

10

20

30

40

50

60

70

80

90

100CV(%)

MeanMedianModeCV

1) Males1) Males


63

Age Profile of Monthly Wages Age Profile of Monthly Wages (DEC 2000)(DEC 2000)

0

100

200

300

400

500

600

700

～19 20～24 25～29 30～34 35～39 40～44 45～49 50～54 55～59 60～64 65～69 AGE

yuan

0

10

20

30

40

50

60

70

80

90

100CV(%)

MeanMedianModeCV



64

Distribution of Monthly Wages Distribution of Monthly Wages (DEC 2000)(DEC 2000)

0

5

10

15

20

25

30

35

350-359 360-449 450-599 600-799 800-1099 1100-1499 1500+

yuan

(%)


Mean: 583 yuan

Median: 430 yuan

CV: 55.0%

1) Males (Total)1) Males (Total)

65

0

5

10

15

20

25

30

35

350-359 360-399 400-459 460-599 600-799 800-1099 1100-1499 1500+

yuan

(%)


Mean: 500 yuan

Median: 420 yuan

CV: 44.4%


2) Females (Total)2) Females (Total)

66

Distribution of Monthly Pension BenefitsDistribution of Monthly Pension Benefits (DEC 2000)(DEC 2000)

0

5

10

15

20

25

30

35

40

1-299 300-349 350-399 400-449 450-499 500-549 550-599 600-699 700-799 800-999 1000+

yuan

(%)

Mean: 464 yuan

Median: 448 yuan

CV: 20.8%


1) Males (Age: 601) Males (Age: 60--64)64)

67

0

5

10

15

20

25

30

35

1-299 300-349 350-399 400-449 450-499 500-549 550-599 600-799 800+

yuan

(%)

Mean: 396 yuan

Median: 402 yuan

CV: 20.1%


2) Females (Age: 552) Females (Age: 55--59)59)

Distribution of Monthly Pension BenefitsDistribution of Monthly Pension Benefits (DEC 2000)(DEC 2000)

68


0

5

10

15

20

25

30

350-359 360-449 450-599 600-799 800-1099 1100-1499 1500+

yuan

(%)


Mean: 620 yuan

Median: 455 yuan

CV: 55.7%

1) Males (Age: 501) Males (Age: 50--54)54)

69

0

5

10

15

20

25

30

350-359 360-449 450-599 600-799 800-1099 1100-1499 1500+

yuan

(%)


Mean: 501 yuan

Median: 421 yuan

CV: 45.7%


2) Females (Age: 402) Females (Age: 40--44)44)

70

Replacement Rate (RR) in 2000Replacement Rate (RR) in 2000

7579

99 96

120113

0

20

40

60

80

100

120

140

Males Females

%

Mean

Median

Mode


Notes: RR=Benefits (age of 60-64)/Wages (age of 50-54) for males

RR=Benefits (age of 55-59)/Wages (age of 40-44) for females

71

Distribution of Household Saving Rate Distribution of Household Saving Rate in 1995in 1995

0

2

4

6

8

10

12

14

16

18

～-50 -50～-20 -20～-10 -10～0 0～10 10～20 20～30 30～40 40～

Saving Rate (%)

(%)

Overall Saving Rate = 1.71%

Source: The 1995 FIES

72

Saving Rate in the PRC EconomySaving Rate in the PRC Economy

SourceSource：： Dr. Ding's own calculation from Dr. Ding's own calculation from China Economic YearbookChina Economic Yearbook

0

10

20

30

40

50

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Year

(%)

Note: Saving Rate = 1 - (Final Consumption)／GDP

73

Distribution of Monetary Asset HoldingsDistribution of Monetary Asset Holdingsfor the Elderly (Age of 55+) in 1995for the Elderly (Age of 55+) in 1995

0

3

6

9

12

15

0 ～2.0 2.0～ 4.0～ 6.0～ 8.0～ 10～ 12～ 15～ 18～ 21～ 26～ 35～ 50～ 100+

1,000 yuan

(%)

Source: The 1995 FIES

Mean : 12,842 yuan

Median : 6,000 yuan

CV : 227%

74

Distribution of WealthDistribution of Wealth//Income Ratio in 1995Income Ratio in 1995

1.83

3.59

0

5

10

15

20

25

0 1～25 25～50 50～75 75～100 100～150 150～200 200～300 300+

Wealth/Income Ratio (%)

(%)

The Overall Ratio = 71.7%

Note: Wealth = Gross Monetary AssetsSource : The 1995 FIES

75Summary of Main FindingsSummary of Main Findings

1.1. Economic status of PRC workers and pensioners basically varied by sex.

2. SOE pensioners and SOE workers were overwhelming in 2000. Social security pensions involved income transfers from non-SOE male workers to SOE male pensioners.

3. Early retirement was very often taking place in 2000. More than 50% of male workers retired by age 57 and nearly 40% of female employees stopped working by age 49 in 2000.

76

4. As for the amount of wages and pension benefits, the mode is usually below the mean or the median. Discussions only based on the mean (the average) would be misleading. Rather, the mode or the median will clarify much more the realities of workers and pensioners. For example, about 30% of workers were earning the minimum monthly wages around 355 yuan in 2000. The mean value of monthly wages was about 580 yuan for males and 500 yuan for females respectively, both standing at about the top 30th percentile of the respective wage distributions.

Summary of Main Findings (ContSummary of Main Findings (Cont’’d)d)

77

5. The typical amount of monthly pension benefits was around 450 yuan for males and 410 yuan for females in 2000. For female pensioners, there was another typical amount of a little less than 300 yuan.

6. Income disparity of pension benefits was relatively small in 2000. Wage disparity was a little wider, whereas the gap in wealth holdings was much larger.

7. Pension benefits played quite an important role in securing old age income. The replacement rate of social security pension benefits was considerably high in 2000. It was about 100% or more for the middle- and low-wage earners. This would operate as a great incentive to early retirement for them.


78

8. The saving rate varied very much from household to household in 1995. Nearly 50% of urban households reported negative saving rates, and consequently the overall saving rate was very low at 1.71%. Those households with saving rates of 20% and over remained minor, consisting of 29% of the entire households.

9. Small savers were quite predominant in PRC and their wealth/income ratio was accordingly very low in 1995. Those households enjoying higher wealth/income ratio at 2.0 and over consisted of only 5.4% of the entire urban households in 1995. The percentage will gradually increase in the future, but will still remain minor.


79

Hot Pension Debate for the Past 10 YearsHot Pension Debate for the Past 10 YearsNew Consensus ReachedNew Consensus Reached

No pension plan is demographically immune. The No pension plan is demographically immune. The crucial variable is economic growth.crucial variable is economic growth.The game is a zero net sum, whether it is PAYG or The game is a zero net sum, whether it is PAYG or funded.funded.Important are incentives and governance, as well.Important are incentives and governance, as well.→→ The latest position of the World Bank; The latest position of the World Bank;

changingchangingNotional DC Plans Implemented in Sweden, Notional DC Plans Implemented in Sweden,

Italy, etc.Italy, etc.

Future Policy OptionsFuture Policy Options

80

Shift to NDC PlansShift to NDC PlansAny penny counts. incentives increased Any penny counts. incentives increased political risks prevented political risks prevented the transition cost problem escapedthe transition cost problem escapedevasion deterredevasion deterredundesirable redistribution eliminatedundesirable redistribution eliminated→→ increased policy optionsincreased policy options

Future Policy Options (ContFuture Policy Options (Cont’’d)d)

81

The Swedish Pension SystemThe Swedish Pension System

0

20 000

40 000

60 000

80 000

100 000

120 000

140 000

0 42 000 100 000

Earnings-related PensionGuarantee

Earnings

(krona)

Benefits (krona)

82

No matter how well a pension system may be No matter how well a pension system may be designed, the system will fail unless participants designed, the system will fail unless participants comply with their contribution obligations. The comply with their contribution obligations. The system has to be incentivesystem has to be incentive--compatible.compatible.The administration should have enough The administration should have enough enforcement capabilities.enforcement capabilities.Lacking are accurate data, record keeping (which is independent of employment) and effective communication with transparency.Financial literacy is still weak both for the majority of urban workers and for the regulatory body (Gov’t).

Asher-Newman (2002), Hoskins (2001)

Challenges for Better ImplementationChallenges for Better Implementation

83

Incentives, governance/implementation, and Incentives, governance/implementation, and system design, are major challenges for PRC system design, are major challenges for PRC pensions.pensions.The current 2The current 2ndnd--tier pension operates as a tier pension operates as a ““PAYG PAYG DBDB”” plan, which would be opposite to an plan, which would be opposite to an originally envisaged originally envisaged ““funded DBfunded DB”” plan.plan.The administratively set low rate of return from The administratively set low rate of return from investment to the 2investment to the 2ndnd--tier incurs a tier incurs a ““hiddenhidden”” tax.tax.Lacking is accumulation of Lacking is accumulation of microdatamicrodata analyses.analyses.The prospects of PRC pensions in the future will The prospects of PRC pensions in the future will not be gloomy if parts of the dividend of economic not be gloomy if parts of the dividend of economic growth are properly transferred to the elderly growth are properly transferred to the elderly population through the pension scheme.population through the pension scheme.

ConclusionConclusion

84

Annual Average Growth Rate in Urban PRCAnnual Average Growth Rate in Urban PRC

9.46

15.4316.49

8.6

12

6.28

4

9.58

0

2

4

6

8

10

12

14

16

18

1978-1999 1990-1999

Real GDPNominal Wage

Real WageRPI

Source: SSB, cited from Zhao-Xu (2002)

(%)

Pension Reform of PRC - Hitotsubashi Universitytakayama/English/pdf/ADBI0212ppt.pdf · Pension Reform of PRC: ... • Creating Guaranteed Minimum Pensions for those with no pensions

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